Monday, August 21, 2006

NYC Pensions

NYT ran an interesting article Sunday on how differences in actuarial assumptions for New York City's pension plans can lead to significantly different pictures of a pension plan's financial status. It is not very clear in the article how the different assumptions were used by the Plan's actuary though the alternative liability valuation methodology reportedly used a risk free asset rate which would currently be in the vicinity of 5%.

The NCPERS 2005 Comprehensive Annual Report had a similar disclosure for last year (2005). The disclosure entitled Other Measures of Funded Status (page 173 ofthe report) clarifies the alternative funded ratio. The Plan's market value of assets is divided by the Market Value of Accumulated Benefit Obligations. In this calculation the plan's assumed rate of investment return is equal to a spread of US Treasury Security yields with durations consistent with expected fund payments (ranging from 4%-6% in this exhibit).

For this measure of funding to be relevant to readers, the exhibit notes prepared by the actuary suggest we suspend the fundamental laws of modern portfolio theory. We must ignore asset allocation..a decision that significantly influences a portfolio's returns and ignore the basic risk & return tenants upon which every institutional investor builds their portfolios.

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